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I was Wrong!

September 18, 2009

I was wrong and I apologise.
I apologise for breaking my own rules.
I was wrong for not seeing or rather ignoring the signals completely.

A few days back, I reiterated my position. My opinion that the global markets seeing a huge bubble type scenario, the last boom, bust and crash.

When I initially posted, my bearishness, I was fully prepared to pay the opportunity cost. Opportunity Cost which comes when you lose a very euphoric part of the rally. When everything you touch is a winning trade and you start planning of an early retirement. It can be a beautiful time to live. But like all good things, it comes to an end badly. And I was ready to stay out of it, and miss it.But many things have changed in between.

What has changed since?

A lot of things. A lot of important things. I initially guessed Chinese markets rallying from here a making a lower high. Well, yes it has rallied to make a lower high, but is it the top?

No, I wont believe it. My system which I had been successfully using in the past on Indian Equity Markets have thrown a buy signal on Shanghai. And being a pure price action guy, had I had the resources I would have taken the trade. So the bottom line, Shanghai will rally and we are not yet there. Am I bearish on the global situation. Hell yes! Does it mean top is here? Hell no!

I have often told, and reiterating it once again, economics and trading are two different things. Lets bother about important stuff like money and investing and trading first. We can safely theoretize about econ later.

What about SPX?What about it? Its testing the downward trending channel made by this bear run and with what it looks like, its going to break out of it, and rally subsequently. See this link for more(thanks to @Woodshedder )

So the question is, are we really doing justice to what the market is showing us. Fundamentally, again, I would defend my views. Somebody has to service the debt, the Fed debt, The Shanghai Debt, The Medicaid yada yada . But who will and when will they, I dont know. Doesnt look like anytime sooner.

Swimming Upstream, today, tomorrow, forever

My effective concern is not that, this is a bubble or not. My effective concern is, too many idiots are very afraid and very cautious about it.I see NIFTY rallying to 5000, and analysts jumping in and saying NIFTY is gonna top out at 5000.(Idiot, Idiot, Idiot!!!) I see and hear  suddenly too much of caution in voices of people who have made an entire career out of throwing the same caution to the winds.
Suddenly everybody has become a crash expert, a financial doom expert, an Indianised version of Mr. GloomBoomandDoom And thats where, I apologise to you for not seeing the right signals when everywhere it was on plain view.

Just recently, I chanced upon a blog which was selling , surprise surprise, tips!!!! Well, he was a shade better than his peers, he was actually actively tracking them. And what I saw, told me the magnousity of how wrong I was, of how wrong I could have been.  In his portfolio he had, around 7-8 well known shares, well known, darling of retail shares like BHARTI AIRTEL, POWERGRID yada yada yada. He posted a snapshot of his portfolio maintained on Excel,on his blog. All had “investment” horizons of 2-3 years. Poor guy is diligent. Has given out four targets for most of his stocks. Some of them showing returns upto 400% in 5 years. Interesting, very interesting. But what caught my attention was one singularly striking thing. He held in his portfolio 4500 puts of NIFTY bought at 165. He plans to hold it for the next three months. But what threw me off guard were his targets. Target 1 was 500, Target 2 was 800 and hold your breath, Target 3 was 1100. Do I remember Black Scholes equation or have I lost my mind. For PE to go above 500, the index has to be in 3900 around with extremely high volatility. 800 is what? 3500 around?

My point is this: If the aam junta, the retail, the dumb money is this cautious, fearful, and anticipating a crash this badly, it really doesnt make any sense for me to stay in their side and expect a crash. Literally everybody in the nation wants the market to go down, that too fast. Why? I reckon they want to buy!!!

Contrarianism Explained

But markets are not gonna give them a second chance. At least not the way they want. I am a contrarian and in some ways, I misread the signals. And this will be a good way to show, how contrarian bias is formed. Being contrarian is not a method of investing, for meI try to make it  a philosophy in life. I have applied it to as diverse as trading, relationships, dating, romance and even future strategizing.  But knowing how to apply it in the right way, takes a bit of insight. The underlying philosophy is the crowd is never right. Copper ’em. Whenever you can, Wherever you can, Whichever way you can. So when the entire crowd thinks and is fearful be aggressive in the same measure. When its greedy, be cautious even more. Market extremes usually give an ample opportunity to read the signals, thwack your head and go the opposite way.

In this business, if an opinion is widely held, then it surely will be proved wrong. Think of it, it makes sense. If money is distributed the way it is today, highly unsymmetric with huge fat tails(take 10 usual persons from your neighbourhood and measure mean wealth. Now add one Rakesh Jhunjhunwala to the group and now calculate average. The 10 of the 11 people will be below the mean. Its called fat tail distribution and can be solved by using Quantile-Quantile plots, but those things later on), then for every million people to lose money, one guy will become a millionaire. How will that guy be  a millionaire. Do just the opposite of what those million people did. Now extend it to every aspect of trading. This is why I believe simplicity can prove to be an advantage. Usually people engage in paralysis by analysis and kill themselves. Also, this is one reason I strongly believe systematic trading can be a harnessed well. So can be quant. The more off-fringe the method is, the better will be its profitability. So the bottom line is copper them.

The End Game

Now how to go about fixing your bias. Once I do get my bias okayed, I just manage my risk exposure of my systems. I dont ignore or liquidate my holdings, I just reduce the exposure. Like, I cut down my slow trades a bit faster. I put a tighter stop loss(again decided by the system). I am a bit more cautious, put the stops as AMO, small things like that.

So how do I get to fix my bias. My usual, indicators, very subjective though and mostly fantastic in market extremes. The name is Hemline Indicator. I blogged about it, long time back, do give it a look. (here) also search for it online, you will getter better idea about it.

The other part, I almost regularly scour through is Common Investing Magazines.

For example notice the recent issue of Outlook Profit. Do look at it, because this is gonna give you a fantastic exercise of first hand contrarianism

Outlook has increasingly cut down on its bullishness and cultivating a cautiousness unseen

Outlook has increasingly cut down on its bullishness and cultivating a cautiousness unseen

The yellowed out part is mine. Notice the pessimism in the tone. Notice a sense of bearishness in the headline which is blaring out. Its dark, filled with an understated sadness, and an ominous feeling. You can click to enlarge but not really quite sure, how clear it will be, since I took a printscreen and posting here. Also note on the sidelines, the column of sophisticated sounding international “experts”(it gives the word a completely different meaning, ain’t it ?) The first one is cautious and asks a question- “is it sustainable?” He is unsure and almost asks a question to his logical self.

A more detailed report of their cautiousness bearishness

A more detailed report of their cautiousness bearishness

This image is the continuation of the same article. With the column on the left is supposed to be a positive upbeat comment, but if you read the green lined section, it makes you wonder if this is the “experts” optimism then what is going to be called pessimism. I havent’ even bothered about highlighting the pessimistic experts opinion.

Notice the very bearish to mild bearish comments made out in the left hand side column. Comments like “canary in the mine”, “potential to signal a deeper correction” “sluggish mid term growth in US” etc. So my dear readers, I lay infront of you, all the nuggets of information which I have gleaned and found to hold some semblence of truth.

Conclusion

I would recommend, myself first, you second to come out of this bearishness. Yes I know we would love to see a correction, and prove all those talking heads right, and make those puts in the money(see above), yet, market is going to carve out a trajectory of maximum pain. And this is gonna continue till the last bear, (this bear cartel was formed in this bear run) is hurt, chopped, killed and his skin flayed. This bear cartel has found a psychologically easy way to be right, be pessimistic. Though they have been rewarded in the previous bear run, but this time they wont be. I would highly recommend ourselves to get hold of things, and be highly aggressive in entering market, on the long side. When I mean aggression, I dont mean ignoring risk management, I mean, with an aggressive bullish bias. Inching your portfolio exposure to market above the normal times, while managing the individual position risk deftly and cleverly.

What is not Prologue, is Epilogue

Some current media reports on present day Fashion:

Upbeat not exuberant

Upbeat not exuberant

No Hemlines- Sobriety, Pessmism

No Hemlines- Sobriety, Pessmism

Public definitely wants more of them with shorter hemlines. Personally I love them both. But when they come with such dresses, it just sounds all the more sweeter.

Update[12.30 pm 22nd Sept 2009]:

Its official now, Rediff posts an update and summary of recently concluded Lakme Fashion Week in Kolkata, titled “Raised Hemlines for rising temperatures”

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2 Comments leave one →
  1. Rohan permalink
    September 29, 2009 9:11 pm

    u look really cute

  2. Marc Shaw permalink
    October 15, 2009 8:42 am

    Hey, I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say GREAT blog!…..I”ll be checking in on a regularly now….Keep up the good work! 🙂

    – Marc Shaw

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